The benefits and risks of private sector involvement in infrastructure

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Since early 1990s, the private sector has become increasingly involved in the provision of urban infrastructure in Australia, under National Competition Policy, to meet the increasing demand of population growth (Ennis 125). Additionally, there is interest in private financing of infrastructure, which was caused by the fiscal crisis of the government, pressure for services and high rates of interest in 1980s.

There are several key levels of private sector involvement including the introduction into the public sector and privatization, among others (Cannadi and Dollery 6).

Throughout this paper the term ‘infrastructure’ will be used to refer to physical and social infrastructure. These two can be simplified by defining them as physical facilities and the services, which are provided (Fox 10). They involve transportation, communication systems, schools, water, and power lines. Moreover, a typical infrastructure project has three phases: construction, operation and ownership (Quiggin 51).

Additionally, there are several key roles of the private sector like developers, which involve financing, constructing, operating, maintaining and managing infrastructure. Private companies have been involved in facility development, like designing, financing, construction, ownership, and operation of a public sector utility (Akintoye et al. 461).

Increased involvement of the private sector in the provision of urban infrastructure in Australia has a host of benefits. Firstly, it gives an opportunity for different players to compete. This type of competition is necessary in order to improve the quality of services offered (Kumar 18).

According to the Australian government, electricity bills fell by approximately 30 percent on average and rail freight rates for the Perth-Melbourne route fell by 40 percent. Service quality and transit times improved, as a result of the introduction of competition in 1995.

Notably, competitive pricing and service improvement are part of the key benefits of the private sector involvement. Additionally, it leads to improved competition, low costs, affordable prices and good quality of services offered (Cannadi and Dollery 14). This is necessary in curbing monopoly within the industry.

Funding infrastructure through the participation of the private sector is another benefit. The private sector can be considered as an additional source of funding, not only in infrastructure provision, but also in the maintenance of existing infrastructure.

For instance, the construction, operation and maintenance of major urban water facilities in Adelaide have been provided by the private sector (Department of the Prime Minister and Cabinet 8).

According to Kirwan 1990, reliance on public funding of the infrastructure can be reduced by making the private sector directly responsible for providing and financing these services. Hence, the financial problems of service authorities can be reduced by funding infrastructure through developers (Kirwan 185).

In addition, budget deficits would be reduced by privatisation in both short and medium terms (Cannadi and Dollery 15). Lack of governmental funding and unwanted low density of suburban development tend to be key reasons for funding by developers. Indeed, there are two ways of funding through developers, which include cash contribution and transfer of assets.

For instance, over 10 percent of Sydney Board’s capital expenditure, including cash and assets, and about 25 percent of assets for providing water and sewerage services in Melbourne since 1991, have been funded by developers (Neutze 23). Other benefits include unavailability of resources, which can be accessed through the private sector, financial assistance to weak systems and risk reduction of public infrastructure investment.

The third benefit of private sector involvement is the positive effect on the overall management. The Department of the Prime Minister and Cabinet, reports that improved management and working practices are potential benefits of the private sector involvement in infrastructure provision.

By basing on their experience, the increased involvement of the private sector leads to the improvement of safety and security. This could be seen through the enhancement of water users’ safety due to this involvement (Department of the Prime Minister and Cabinet 7).

The fifth benefit is the achievement of efficiency in terms of delivering infrastructure. In accordance with the Department of the Prime Minister and Cabinet, by using new technology, the private sector is capable of providing improved infrastructure, i.e. water delivery.

By comparing the private sector’s delivery of infrastructure to the public sector, the former seems to be more sufficient (King and Pitchford 313). This is associated with private sector profit. An increase in infrastructure delivery means more users and thus greater profitability. Consequently, private sector’s revenue would be affected negatively unless the infrastructure’s efficiency and quality are fulfilled.

On the other hand, the involvement of the private sector has some potential risks. The first risk is associated with construction and operation phases. The Department of the Prime Minister and Cabinet states that a private operator can fail to deliver sufficient services as a financial provider, simply because of unavailability of resources to support the project.

Additionally, the key reasons for construction and operation risks could be specified in escalation of costs, including construction, operation and maintenance costs, faulty techniques and delays in construction (Grimsey and Lewis 108). Another part of these risks is caused by the mismatch between supply and demand associated with the basic infrastructure and services (Global Network for Disaster Reduction 1).

These tend to be the effect of unexpected changes in cost, interest rate and/or demand. The effect of unexpected change in demand, for example, can be shown through the over demand of the Sydney City to the Airport rail link, and therefore the private firm failed to operate the facility (Cannadi and Dollery 5). In terms of ownership phase, the public sector is considered to be better placed to deal with risks than the private sector.

In another aspect of the risks associated with standards and regulation, PPIAF and the World Bank allocated the private sector’s risks comprising of:

Failure to meet the required standards
Changing regulations, standards or pricing over the contract period (Global Network for Disaster Reduction 1).

Since the private sector is putting high priority on increasing profit, infrastructure provision at low income areas and some suburbs, the value of land might be affected negatively. Accordingly, this would raise the issue of equity. If the developers bear the cost of infrastructure provision, either the prices for products will be increased or the payment for raw land will be low, especially in the long-term (Neutze 24).

Moreover, the increase in unemployment is another risk associated with private developers. Cannadi and Dollery (2004) assert that private sector involvement in the provision of public sector infrastructure services leads to unemployment. Furthermore, this approach has environmental risks.

This is because the private sector does not bear the external environmental impact which result from either producers or consumers (Productivity Commission 1).

Conclusion

Increased involvement of the private sector in infrastructure development is due to population growth, high demand for infrastructure and services, and the governmental need for additional sources of funding. Similarly, there are several benefits, ranging from quality of services to affordable prices. However, it is important to note that this involvement has some risks, which have to be considered while making decisions.

It is recommended that the authorities should pay sufficient attention on allocating and analysing the potential risks in order to reduce their impact before creating the contractual arrangement of each infrastructure project, involving the private sector. This would allow the private sector to play an essential role in providing high quality, affordable and sustainable services and urban infrastructure.

Works Cited

Akintoye et al. “Achieving best value in private finance initiative project procurement.” Construction Management and Economics 21. 5 (2003): 461–470. Print.

Cannadi, John and Dollery Brian. “An Evaluation of Private Sector Provision of Public Infrastructure in Australian Local Government.” University of New England, School of Economics, 2004. Web.

Department of the Prime Minister and Cabinet. “A Discussion Paper on the Role of the Private Sector in the Supply of Water and Wastewater Services.” Australian Government, 2006. Web.

Ennis, Frank. Infrastructure Provision and the Negotiating Process, Ashgate Publishing Ltd., Hampshire, 2003. Print.

Fox, William. Strategic Options for Urban Infrastructure Management, World Bank, Washington, D. C., 1994. Print.

Global Network for Disaster Reduction. “Urban Risk Reduction: Private-Public Partnerships –Civil Society Perspectives.” Global Risk Forum, 2008. Web.

Grimsey, Darrin and Lewis Mervyn. “Evaluating the risks of public private partnerships for infrastructure projects.” International Journal of Project Management 20 (2002):107-118. Print.

King, Stephen and Pitchford Rohan. “Privatisation in Australia: Understanding the Incentives in Public and Private Firms.” Australian Economic Review 31. 4 (1998): 313-28. Print.

Kirwan, Richard. “Infrastructure Finance: Aims, Attitudes and Approaches.” Urban Policy and Research 8. 4 (1990): 185 – 193. Print.

Kumar, Deepak. “Infrastructure in India.” The ICFAI Journal of Infrastructure (2005):18-19. Print.

Neutze, Max. “Funding Urban Infrastructure through Private Developers.” Urban Policy and Research 13.1 (1995): 20 – 28. Print.

PPIAF and World Bank. “Approaches to private sector participation in water services – a toolkit.” The World Bank Group, 2006. Web.

Productivity Commission. “Public Infrastructure Financing: An International Perspective.” Australian Government, Productivity Commission, 2009. Web.

Quiggin, John. “Private Sector Involvement in Infrastructure Projects.” Australian Economic review 96.1 (1996): 51-64. Print.

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The benefits and risks of private sector involvement in infrastructure

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